Clouds have enveloped Sydney this August. Heavy rains have stubbornly lingered during Australia’s winter and the usually optimistic smiles of its people have temporarily turned to grimaces.
One of the reasons is that a new government has taken a step back from consumer protection legislation for the financial services industry.
The plan was to toughen regulation around financial advice. Fofa (the Future of Financial Advice) was going to improve trust in the financial services sector for retail investors and ensure high quality financial advice was available, accessible and affordable. One of its requirements was to provide retrospective fee disclosure statements to existing clients.
But three months after the election of a Conservative, Liberal National government headed by Prime Minister Tony Abbott, changes to Fofa were announced. The new government was implementing its election promise of lifting the regulatory burden on the financial services sector and reducing compliance costs (by an average of approximately A$190m (£107m) a year. These amendments were voted through in the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014.
While RDR was bedding down in the UK, Australia was seeking to retract pieces of enhanced financial advice regulationSo, while RDR was bedding down in the UK, Australia was seeking to retract pieces of enhanced financial advice regulation. Objections by the media, sections of the superannuation industry and financial services executives and even some high profile financial planners were voiced loudly but to no avail. Given that the intention of Fofa was to improve trust and confidence it seems alarming that the industry itself was complaining about the dilution of Fofa.
Confidence - in the government this time - was further shaken by an unprecedented move by a Senate Committee. Following an inquiry, it called for a Royal Commission to look into the conduct of financial planners at the Commonwealth Bank of Australia. The language was severe. The Committee labeled the conduct of a number of ‘rogue advisers’ unethical and dishonest and blamed them for a grievous breach of duties and deliberate neglect of clients in order to benefit their own interests. It was scathing of the bank’s compliance regime and suggested that both the bank and the regulator, the Australian Securities and Investment Commission (ASIC), had placed reports of fraud in the ‘too-hard basket’.
At the centre of this latest banking failure was a process by which clients, including pensioners, were moved from conservative risk investments to high-risk products without their knowledge. Advisers received bonuses and recognition as ‘high performers’ for making the switch. Following the senate committee’s unprecedented criticism the bank’s chief executive, Ian Narev, apologised to customers affected by the actions of financial advisers and staff of Commonwealth Financial Planning. “We are truly sorry and we acknowledge the financial hardship you suffered as a result of the poor advice, and that is the most critical message…” he said.
The Prime Minister Tony Abbott called the Senate Committee’s revelations “terrible”. But calls for a Royal Commission were rejected by the Federal government as too costly and a duplication of elements of financial governance being examined by the Financial Services Inquiry. The FSI is reviewing how the financial system can best meet Australia’s evolving needs and support Australia’s economic growth.
As a remedial step the Open Advice Review Programme was set up to offer the bank’s clients an assessment of any advice they had received and the services of an independent customer advocate. The bank had already paid A$52m (£29m) in compensation to more than 1100 customers under a previous investigation of the same problem.
But the Commonwealth Bank is not the only major Australian financial institution undergoing scrutiny. Macquarie Equities Limited (MEL), part of the Macquaire Group, has also been forced into expensive re-examination of its financial advice. ASIC has ordered Macquarie to contact every client of its financial planning business (around 160,000) since its formation in 2004. The regulator said compliance deficiencies had involved a significant number of MEL’s advisers and included failing to demonstrate a reasonable basis for advice provided to clients.
Some of us observing Australia’s growing mis-selling scandals are asking whether the industry will suffer more in the long run from compensation and lost confidence than it would if tougher regulation had been implemented, as through Fofa.
Summarising the regulator’s concerns, Peter Kell the deputy chairman of ASIC, said that “This is an industry which most certainly needs to lift its game, this is an industry which has to put the customer back at the centre of their business model.”
The fact is, of course, that the scandal happened on ASIC’s watch. Now politicians and financial services commentators have called on the regulator to lift its own standards and allocate more resources to regulating financial advisers. No doubt in its defence, ASIC will point out that its budget was cut by A$12m (£6.5m) in the May Federal Budget.
One way or another the reputation of Australia as a highly successful pensions and financial services reformer is beginning to slip. As an Aussie-Brit I have been used to talking about the lessons the UK can learn from Australia’s compulsory pension (superannuation) system. It has grown in popularity, contribution levels are relatively high and it has broken new ground in pension communication. But financial advice continues to be expensive. Can this be right in a nation where people are compelled to save and invest?
Price capping or explicit cost containment has been rejected by politicians and civil servants on largely ideological grounds. Time will tell whether the recent inappropriate conduct by the advisory community and ongoing political scrutiny will lead to more regulation. The UK has shown how industry, politicians and advisers can work together to find solutions to protect and enhance financial advice. Problem solving by the financial advisory industry has been less combative and more collaborative than in Australia.
Nevertheless, one of the issues that both countries need to tackle is finding post-retirement income solutions. As pension balances increase and asset growth overall begins to swell in the UK, financial advisory regulations may need to be regularly reviewed to ensure that retirement incomes are maximised.
David Harris is managing director of Tor Financial Consulting
Key points
* The Tony Abbott government has taken a step back from consumer protection legislation for the financial services industry
* A Senate Committee called for a Royal Commission to look into the conduct of financial planners at the Commonwealth Bank of Australia
* Some are asking whether the industry will suffer more in the long run from compensation and lost confidence
